Internet should remain free of sales tax

March 26, 2011

Freedom New Mexico

For years we’ve fought putting new taxes on Internet activities. But like a bad computer virus, that idea keeps coming back. The latest manifestation is what’s called the “Amazon tax.” But it also would hit many more companies than online retailer Amazon.com, including hundreds of thousands of small businesses that sell online.

In California, the latest tax idea is Assembly Bill 153, by Assemblywoman Liz Skinner, D-Berkeley. The bill is so complicated that, even the Legislative Counsel’s Digest’s summary is a single, run-on sentence clot of 92 words of legalese.

Essentially, what would happen is this. Currently, Amazon’s sales in California are not charged California sales tax. That’s because numerous federal court rulings stipulate that such taxes can only be collected if a company has a “nexus” in a state — that is, an actual, bricks-and-mortar store, like Wal-Mart. Amazon doesn’t have any such stores in California.

Individual Californians, when they buy from Amazon, technically are supposed to pay the sales tax themselves. Few do.

What’s different with AB153 is this: As you may have noticed when using Amazon.com or other retailers, you can buy goods not only directly from Amazon, but from what are called Amazon’s “affiliates.” So, a new book for $25 on Amazon might be available used for $5 from an affiliate. Those affiliates, not Amazon, send you the item. Sometimes the affiliates are large outfits (for books, cooking supplies, musical instruments, computers — almost anything). But sometimes they’re mom-and-pop outfits.

AB153 would force California-based affiliates to pay taxes for any sales to California residents. An analysis by the state Board of Equalization found that there’s “considerable uncertainty” how much revenue AB153 might bring in. It could be as much as $317 million in fiscal 2012-13.

However, if Amazon carries out its threat to close down its affiliates to avoid the tax, that amount could drop to $234 million. That’s less than 1 percent of the $25 billion budget deficit the state faces.

Amazon is not making an idle threat. When Illinois imposed an Amazon tax this month, Amazon fired the state’s 9,000 affiliates. And last month, when Texas sent a $269 million sales tax bill to Amazon because it has a distribution facility there, Amazon made plans to move.

Moreover, when those mom-and-pop affiliates are forced to close down, they no longer pay other state taxes, such as on income and property.

For California, instead of seeing this effort as another excuse to poach taxpayers, it should be seen as an opportunity. Why not ask Amazon’s former Illinois affiliates to relocated here? And why not ask Amazon to locate that distribution center from Texas to California, with a promise to refrain from taxing it?

Even more important, California remains the world’s locus for Internet technology. More use of the Internet means more purchases of products from Apple, Intel, Conexant, Facebook, Broadcom, and so many others. The more products California companies sell, the more they pay in income, property and sales taxes.

Skinner’s staff told us that AB153 would be considered in the Assembly Revenue and Taxation committee “in the next few weeks.” It should be ditched there.

Gov. Arnold Schwarzenegger vetoed similar bills. It’s not known what Gov. Jerry Brown would do. He was governor in the 1970s when two kids named Steve — Jobs and Wozniak — started Apple Computer in their garage in what would become Silicon Valley. Today, Apple is the second-biggest corporation in the world.

Taxing the future would be another fiscal folly in a state that has committed too many of them. Instead, let’s keep the Internet free for opportunity.